Bitcoin Explained for Beginners

written by David AmoyalPublish date: 01/11/2018(Last updated: May 17, 2018 03:54 PM)

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Bitcoin is a digital currency that lives entirely electronically. It is decentralized, meaning no single entity owns it. It runs on the blockchain and is not printed, but is produced by the Bitcoin protocol.

Bitcoin’s explosive growth in price has attracted interest from a wide variety of people, but many are still hazy on the technical aspects that make Bitcoin so great.

What started off as a small collective of crypto innovators and extremely early adopters has evolved into a burgeoning community of people with mixed backgrounds coming from a variety of industries.

This guide will help you understand what makes Bitcoin so special, and developments that have contributed to its growth.

If you’re new to the cryptocurrency world, don’t fret. We’ll walk you through everything you need to know in a simple, easy-to-understand way.

Article Summary

Bitcoin Basics

The three terms you’ll hear thrown around often when describing Bitcoin include digital, decentralized, and blockchain. Let’s dive in:

1. Bitcoin is a Digital Currency.

This means there are no physical Bitcoins in circulation, and the coin is entirely digital. It is programmed in a way that it is based on mathematical proof, making it an extremely consistent self-auditing and self-validating system.

2. Bitcoin is Decentralized.

Since Bitcoin doesn’t have any central server, no single entity has control over its supply and price. For example, there is no central bank that can pump Bitcoins out in the same way they do with fiat to manipulate the price that arises from the supply and demand.

3. Bitcoin is Built on Blockchain.

Blockchain is essentially a ledger or database that keeps a history of every single transaction that has ever taken place. This makes Bitcoin transactions extremely transparent and verifiable by participants. While there are much more complexities to the blockchain, just think of it is as a ledger used to track transactions.

People who have bought Bitcoin early on were able to enjoy a sizeable return on their investment because Bitcoin is still in its early adoption phases. There are relatively very few outside forces that are impacting Bitcoin, as the space hasn’t gone through extensive regulatory oversight, or been touched by a derivatives market.

Many of Bitcoin’s real-world use cases are still evolving as adoption of this token increases.

Bitcoin Advantages

The two main features of Bitcoin create a ton of value for people who use Bitcoin.

Autonomy

Since Bitcoin isn’t controlled by a central bank or regulatory authority, your funds can’t be frozen and future withdrawals can’t be prevented. There is also no limit to how much you can withdraw, deposit, or how much is transferred between locations.

Free Access to Information

Since all transactional information is accessible through the blockchain and can be seen on blockchain explorers, users are able to see any pertinent information they want.

“The nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime”

Satoshi Nakamoto

How to Buy Bitcoin?

Not only has the Bitcoin development community worked hard to put together a ton of resources and tools to make Bitcoin more accessible, the infrastructure around buying Bitcoin has gotten much more convenient for beginners.

Here are a few of the standard steps to get you started:

Set up a wallet

Wallets can be downloaded online at websites like Blockchain.info. Most exchanges such as Coinbase also come with a wallet native to the platform.

Back up your Keys

An individual’s Bitcoin balance is kept using two keys: a public key (which is similar to a bank account number) and a private key (similar to a PIN number). The keys themselves are actually long strands of numbers and letters. The private key serves as a means to unlock your wallet and make Bitcoin transactions, and you should never give your private key to anyone. The public key is where others can send you bitcoins that will go into your wallet.

Choose an Exchange Platform

There are a handful of different exchange platforms that serve the purpose of allowing users to buy and sell various cryptocurrencies. A few of the most popular include:

This option is extremely popular among new users because the interface is built to be very user-friendly and straightforward. After getting their profile verified, users can buy Bitcoin on Coinbase simply by placing an order, which Coinbase itself fulfils. However, using Coinbase also comes with fees that range from 1.49% to 3.99% based on your payment method of choice. Currently, you can only buy Bitcoin, Ethereum, and Litecoin on Coinbase. However, it is one of the few platforms that allows for a fiat to Bitcoin transaction. Learn how to use Coinbase

There are also many exchanges such as Bittrex that allow for the exchange of Bitcoin for hundreds of other altcoins. In order to use one of these platforms, you would have to transfer Bitcoin into your Bittrex wallet address, then make your exchange on Bittrex. Learn how to use Bittrex

Make a purchase

The complexity involved with making a purchase varies on the platform of choice. For example, if you use Coinbase, you can purchase Bitcoin using the money from your linked bank account. It would then show up in your Bitcoin wallet within 3-5 days. From there, you could send it directly to your wallet of choice you set up in step 1.

Definition: altcoin, noun: Essentially, any coin that isn’t Bitcoin.

How to Trade Bitcoin?

Once you’ve got some Bitcoin, you can trade it for a variety of different altcoins. In order to do so, you need to move the amount of Bitcoin you want to trade into an exchange that supports your altcoin of choice. For this example, we’ll use Bittrex:

Step 1: Transferring to the exchange. In order to do this, you will need the public key of your exchange wallet. Be sure to copy and paste your address exactly as it appears and verify to ensure you’re sending it to the right address. If you deposit any tokens that aren’t BTC to this address, you will lose them; be careful.

Step 2: Placing the order. Let’s say you want to exchange BTC for ETH. Select the currency pair for Bitcoin markets, and type in ETH.

Step 3: Making the order. Once you scroll down, you’ll see the option to buy or sell ETH. Type in the amount of ETH you’d like to buy, and adjust the price you want to pay at the “Bid” section. This will place an order at the price you want to pay, and if the market matches your order with another seller, it will be completed and added to your Bittrex wallet for that specific currency.

Bitcoin Exchanges

Bitcoin exchanges are online platforms where users can buy, sell, and exchange other cryptocurrencies. These transactions can be done with fiat currencies or cryptocurrencies, depending on which exchange is being used.

Exchange

Country

BTC pairs

Fees

Coinbase

United State

BTC and LTC/ETH

1.49% - 3.99%

Bittrex

United State

Multiple Cryptos

0.25%

Gemini

United State

BTC Only

0% - 0.25%

Bitstamp

UK

Multiple Cryptos

0.10% - 0.25%

Poloniex

United Kingdom

Multiple Cryptos

0.15% - 0.25%

Bitfinex

British Virgin Islands

Multiple Cryptos

0.1% - 0.2%

When evaluating an exchange, investors should look out for the exchange’s reputation, fees, and payment methods. Some of the most popular, well-respected exchanges include Coinbase, Bittrex, and Poloniex.

Transfer fees between tokens vary on the urgency of the transaction and type of token. For example, Bitcoin usually tends to have much higher fees than Litecoin. In high volume hours, Bitcoin fees will be much higher than usual.

Most exchanges come with a live ticker chart showing the current price charts and the Bid/Ask spread. Be sure to familiarize yourself with these to understand the direction of prices. Each exchange come with different exchange fees, and it’s important you know these ahead of time.

Trading fees usually hover around between .1% to .025%, but can be significantly higher depending on the exchange. These exchange fees serve to reward the exchange for providing the service of facilitating the transaction between users and are set by the exchange.

How Bitcoin Transactions Work?

Bitcoin transactions may seem complex, but they are fundamentally easy to understand.

Remember, the blockchain is essentially just a giant ledger that keeps a record of every transaction. If Mike sends Ike a few Bitcoin, the transaction is noted with three pieces of information: the input (which Bitcoin address sent coins to Mike in the first place), the amount (let’s say 2 BTC), and the output (Ike’s public address meaning his public key).

When Mike sends BTC to Ike, he signs off on this transaction using his private key. This lets the ledger know the transaction has been approved, and that the source of the coins and the amount are legit.

““I’m sure that in 20 years there will either be very large (bitcoin) transaction volume or no volume”

Satoshi Nakamoto

Now, you may have been thrown off by the word “mining”. This term refers to the transaction verification process. “Miners” are people running Bitcoin mining programs on their computers or rigs. These programs run mining algorithms to solve a math problem, which is what it takes to verify the transaction. Currently, the Bitcoin method of verification is Proof-of-Work.

Miners receive transaction fees, as well as the potential to actually “mine” Bitcoin, which serves as a reward and incentive for miners. Currently, the reward is 12.5 Bitcoins.

What is a Bitcoin Hard Fork?

You may have heard of different types of Bitcoin floating around, such as Bitcoin Cash and Bitcoin Gold.

While this might come off as confusing to some, think of it like a new version being released in addition to the existing one.

A “hard fork” is essentially a fork of the existing blockchain, meaning the new token considers all transactions up until the point of the fork as vali. Every following transaction on the new chain is unique to the forked currency.

A hard fork isn’t backwards compatible, meaning that the new blocks/transactions cannot operate on the old version of the protocol.

An interesting thing to note is that some exchanges and wallets support the forking by honoring people who have BTC at the time of the fork with an equal amount of the forked coin. For example, if you had 10 BTC at the time of the Bitcoin Cash fork, you’ll have a total of 10 BTC and 10 BCH once the fork has been completed.

Whenever Bitcoin hard forks with substantial support on the forking side, there is some sort of fluctuation in the price.

How to Store Bitcoin?

Owning Bitcoin comes with a high degree of responsibility. Leaving your Bitcoin unsecured makes it easy for a malicious third party to swoop your hard earned money.

This is why it’s important you understand the variety of security solutions available. Cryptocurrency wallets are programs that store the private and public keys that are used to make blockchain transactions happen.

There are five types of Bitcoin wallets:

Desktop Wallet

Desktop wallets are actual apps that are installed on your computer.

The vast majority of desktop wallets are free.

These wallets encrypt your private keys and required a password to decrypt them every time the wallet is opened.

Most desktop wallets come with a seed that can be used to restore your wallet if you end up losing your computer or it gets stolen.

These wallets live on your desktop, and are still exposed to a slight amount of risk.

Mobile Wallet

Mobile wallets are apps installed on your phone. Since these wallets live on your phone, it makes them much easier to use on the go.

The vast majority of mobile wallets are free.

Most mobile wallets come with a seed that can be used to restore your wallet if you end up losing your computer or it gets stolen.

These wallets live on your phone, and are still exposed to a slight amount of risk.

Online Wallet

Online wallets exist on online platforms, and are often called “hot” wallets.

Many of these wallets are free.

Hot wallets provide easy access to trading, and many live on actual exchanges.

These are inherently riskier than wallet options that aren’t connected to the Internet.

Hardware Wallet

Hardware wallets exist on a physical piece of hardware.

The main selling point of hardware wallets is that, since they are offline, they are the most secure you can be. This is why they’re often recommended for your long-term holds.

Most hard wallets aren’t free, and can cost upwards of $100 to $200, with the average being around $60.

Most hardwallets come with a seed that can be used to restore your wallet if you end up losing your wallet or it gets stolen.

Paper Wallet

Paper wallets are documents that contain all of the data required to generate Bitcoin private keys. The term also refers to the storing of bitcoins offline on a physical document. This is essentially your private key either written exactly, or as a redeemable code. Although safe, paper wallets can be prone to being lost. Additionally, while being generated online, your keys can be exposed to malicious players.

There are many websites such as cryptocompare.com that offer overall ratings, user reviews, and evaluation metrics such as anonymity, ease of use, and quality of extra services.